Inflation is when prices rise because demand exceeds supply. Inflation reduces consumers’ purchasing power so their money buys less over time.
Example: Summer Camp Candy
Say you go to summer camp for four weeks, and everyone at camp likes candy. Several kids bring boxes of candy to sell, and the first week individual candies are selling for ten cents.
By the second week, the sellers realize they didn’t bring enough candy, and decide to raise the price to 25 cents.
By week three, supplies are running really low and some kids who bought candy early start re-selling it for 50 cents. The original sellers raise their prices to 50 cents too.
By week four, there’s almost no candy left, and everybody’s fighting to get some. One or two kids offer five dollars per piece. This is called ‘hyper-inflation’… when price rises dramatically, like from ten cents to five dollars in under a month. Even at this hyper inflated price, a few desperate kids will pay up.
Silly? Maybe. But this happens all the time in the real world.
Inflation is tracked closely by economists, and over the past thirty years they claim it has stayed low. Prices for consumer staples like food, clothing, and transportation have remained steady or even gone down (deflation).
But one or two important things have skyrocketed in price, like housing. In many California cities, for example, house prices have tripled in just twenty years.
That’s because lots of people moved to California, and demand for housing increased hugely relative to the supply.
Just like the candy.
So when some economist tries to tell you that there’s been no inflation recently, ask them if they’ve tried to buy a house in California, or candy the last week of summer camp!